Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist

Optimal regulation of a polluting natural monopolist must correct for both external damages and market power to achieve a social optimum. Existing non-Bayesian regulatory methods require knowledge of the demand function, while Bayesian schemes require knowledge of the underlying cost distribution. We introduce mechanisms adapted to use less information. Our Price-based Subsidy (PS) mechanisms give the firm a transfer that matches or approximates the incremental surplus generated each period. The regulator need not observe the abatement activity or know the demand, cost, or damage functions of the firm. All of the mechanisms induce the firm to price at marginal social cost, either immediately or asymptotically.surplus subsidy schemes, polluting monopolist, verifiable regulatory mechanisms

A non-Bayesian Piecewise Linear Approximation Adjustment Process for Incentive Regulation

The chord-approximation adjustment process for incentive regulation of public utilities suggested by Vogelsang (1988) induces the regulated firm to engage in strategic behaviour instead of converging to marginal cost pricing. In this paper, we show how a non-Bayesian piecewise linear approximation of demand can eliminate this problem